How does SBI’s move to link savings deposit and short term loan rates to repo rate impact you?

It was about two years ago that SBI made the first move and cut savings deposits rate by a tidy 50 basis points. With other banks having followed suit, low-value savings deposit rate currently fetch 3.5 per cent (against 4 per cent in the past). If depositors were rattled by the banks’ move then, SBI’s move to link savings deposit rate to repo rate effective May 1, implies more pain in a rate easing scenario — savings deposit rates can move even lower if the RBI cuts repo rate in the coming months.

SBI has linked savings bank deposits, with balances above ₹1 lakh to repo rate — 2.75 per cent below repo rate. At the current repo rate of 6.25 per cent, this works out to the 3.5 per cent. While this implies that there will be no immediate impact for depositors, if the RBI cuts repo rate by 25 bps in its next policy review in April, savings deposits with SBI would fetch a lower 3.25 per cent.

On the other hand, SBI has also linked cash credit accounts and overdrafts with limits above ₹1 lakh to repo rate. Hence borrowers would gain when the RBI cuts repo rate, as lending rates on these short-term loans would become cheaper.

On other variable rate loans such as home loans or corporate loans too, lending rates should move lower as SBI’s cost of funds will come down, forcing a MCLR (marginal cost of funds lending rate against which such loans are benchmarked) cut.

Hence while you may cringe at the lower rate as a depositor, as a borrower, you can hope for faster cuts in lending rates.

Depositors’ pain

There is no denying that SBI’s move linking savings deposit rates with repo rate will hurt depositors in a rate easing scenario. But the impact may not be much for a depositor with low value deposits in absolute terms. Consider this: On ₹10 lakh deposit, RBI’s 25 basis point cut will imply a loss of ₹2,500 annual interest, if savings deposit rate move from 3.5 per cent to 3.25 per cent. On a ₹1 crore deposit, the impact will be a higher ₹25,000 of interest loss.

Given that a chunk of the deposits (about 90 per cent) is below ₹1 crore, most depositors will not see a big impact of lower savings deposit rate. Of course, frequent and faster cuts could hurt in the short term. But importantly, SBI’s move will bring in more transparency in the way savings deposit rates are fixed.

Interest on the savings account was deregulated in October 2011. But nearly all banks stuck with offering a 4 per cent rate on the savings deposit, even in rising rate cycles. This cartelisation of sorts was broken in July 2017, when SBI cut savings deposit rate by 50 bps. But other banks were quick to follow and since then, rate on low-value savings deposits has been stuck at 3.5 per cent. Even when banks were increasing fixed deposit rates aggressively last year, they did not hike savings deposit rates.

SBI’s move to link savings deposit rates to repo rate could change the opacity and rigidity in savings rate. Hence in a year or two later, when RBI starts to increase the repo rate, SBI’s savings deposit rate would also move up, benefitting depositors.

Borrowers’ gain

In a bid to fix the perpetual issue of transmission, the RBI had mandated banks to peg their lending rates on new floating rate for personal loans, retail loans and loans to micro and small enterprises from April 1, 2019, to external benchmarks.

For now SBI has linked cash credit accounts and overdrafts with limits above ₹1 lakh to the Repo Rate—2.25 per cent above repo rate. Hence a 25 bps cut in repo rate would imply an immediate respite for such borrowers.

For other borrowers too a rate cut by the RBI could lead to faster reduction in lending rates than in the past. Why?

The key structural issue with transmission has been that banks source only a minuscule portion of their funds (1 per cent) from the repo window and rely significantly on longer term deposits. Hence only about 50-60 per cent of banks’ funding gets re-priced.

Hence a cut in repo rate does not immediately reduce their costs. Linking savings deposits to repo rate can iron out this issue to some extent. For SBI about 37-40 per cent of deposits are savings deposits, of which a chunk are above Rs 1 lakh.

This implies that about 30-35 per cent of deposits will get repriced with changes in repo rate. Hence a 25 bps repo rate cut could result in 6-9 bps reduction in benchmark MCLR. Lending rates on loans such as home loans, corporate loans etc. linked to MCLR would fall faster, benefiting borrowers.

Ifs and buts

However the adhoc way in which banks determine spreads — over and above the benchmark lending rate to arrive at the effective lending rate — still remains a concern and could impede transmission. Also, it needs to be seen if other banks would follow suit.

Adhoc practices followed by banks while fixing lending rates under MCLR, slow migration to MCLR regime by banks etc., have impeded transmission under MCLR in the past.

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